If you are dealing with agricultural commodity like Coffee or Pepper then the
fundamental analysis includes analyzing rainfall, harvest, demand, supply, inventory
etc. However the fundamentals of metal commodities are different, so is for energy
commodities. So every time you choose a commodity, the fundamentals change.
However the concept of technical analysis will remain the same irrespective of the
asset you are studying. For example, an indicator such as ‘Moving average
convergence divergence’ (MACD) or ‘Relative strength index’ (RSI) is used exactly the
same way on equity, commodity or currency.
2.3 – Assumption in Technical Analysis
Unlike fundamental analysts, technical analysts don’t care whether a stock is
undervalued or overvalued. In fact the only thing that matters is the stocks past
trading data (price and volume) and what information this data can provide about
the future movement in the security.
Technical Analysis is based on few key assumptions. One needs to be aware of
these assumptions to ensure the best results.
1)
Markets discount everything
– This assumption tells us that, all known and
unknown information in the public domain is reflected in the latest stock price. For
example there could be an insider in the company buying the company’s stock in
large quantity in anticipation of a good quarterly earnings announcement. While he
does this secretively, the price reacts to his actions thus revealing to the technical
analyst that this could be a good buy.
2)
The ‘how’ is more important than ‘why’
– This is an extension to the first
assumption. Going with the same example as discussed above – the technical
analyst would not be interested in questioning why the insider bought the stock as
long he knows how the price reacted to the insider’s action.
3)
Price moves in trend –
All major moves in the market is an outcome of a trend.
The concept of trend is the foundation of technical analysis. For example the recent
upward movement in the NIFTY Index to 7700 from 6400 did not happen overnight.
This move happened in a phased manner, in over 11 months. Another way to look
at it is, once the trend is established, the price moves in the direction of the trend.
4)
History tends to repeat itself –
In the technical analysis context, the price trend
tends to repeat itself. This happens because the market participants consistently
react to price movements in a remarkably similar way, each and every time the price
moves in a certain direction. For example in up trending markets, market
participants get greedy and want to buy irrespective of the high price. Likewise in a
down trend, market participants want to sell irrespective of the low and unattractive
prices. This human reaction ensures that the price history repeats itself.